中国不良贷款和资产支持证券市场_外国投资者和金融家指南I（英文版）

Summary of China's NPL and ABS Markets for Foreign Investors and Financiers

Core Content

This document provides an overview of the opportunities and challenges for foreign investors and financiers in China's non-performing loan (NPL) and asset-backed securities (ABS) markets. It outlines the regulatory framework, key players, and various access channels for foreign participation in the NPL market, as well as the legal and operational considerations involved in acquiring and managing NPL portfolios.

Main Points

1. NPL Classification and Statistics

• Chinese commercial banks classify loans into five categories: normal, special-mention, substandard, doubtful, and loss.
• NPLs (non-performing loans) are defined as loans classified as substandard, doubtful, or loss.
• As of the end of 2018, Chinese commercial banks held RMB 2.03 trillion (USD 301.95 billion) in NPLs, up from RMB 1.70 trillion (USD 252.87 billion) in 2017.
• Special-mention loans, which are one notch above NPLs, totaled RMB 3.46 trillion (USD 514.66 billion) in 2018.

2. Key Players in the NPL Market

• The National AMCs (Asset Management Corporations) are the primary entities involved in NPL trading.
• There are four National AMCs, each associated with a major state-owned bank:
  • China Cinda Asset Management Co., Ltd. – China Construction Bank and China Development Bank
  • China Great Wall Asset Management Corporation – Agricultural Bank of China
  • China Huarong Asset Management Co., Ltd. – Industrial and Commercial Bank of China
  • China Orient Asset Management Corporation – Bank of China
• Local AMCs have also emerged, with approximately 50 in operation as of 2019. They are generally allowed to transfer NPLs outside their home province.

3. Access Channels for Foreign Investors

• Purchasing NPL portfolios from AMCs: This is the main and most direct method for foreign investors. The process involves competitive bidding and is streamlined over time.
• Shenzhen NPL Pilot Program: Allows foreign investors to directly purchase NPLs on a non-bulk basis from Chinese banks and through AMCs on the Qianhai Financial Assets Exchange (QEX).
• Investing in NPL ABS: Foreign investors can participate in NPL ABS (Asset-Backed Securities) through established channels such as QFII, RQFII, and Bond Connect.
• Joint ventures with National AMCs: Foreign investors can form joint ventures with National AMCs to acquire and manage NPL portfolios.
• Establishing wholly foreign-owned non-licensed AMCs: These entities can participate in the Secondary Market but not the Primary Market.

4. Process for Acquiring NPL Portfolios from National AMCs

• A common structure involves an offshore SPV (Special Purpose Vehicle) to acquire NPL portfolios.
• The process includes:
  • Competitive bidding
  • Regulatory approval
  • Transfer of NPLs to the offshore SPV
  • Tax withholding and payment
• The QEX (Qianhai Financial Assets Exchange) plays a key role in facilitating the transfer and registration of NPLs.

5. Key Issues for Foreign Investors

• Cross-border remittance of NPL payments: Involves setting up NRA (Non-Resident Accounts) and managing the transfer of RMB proceeds to offshore accounts.
• Chinese tax implications: Include enterprise income tax, value-added tax, stamp duty, and deed tax. Non-compliance can lead to severe penalties.
• NPL servicing: Effective servicing is crucial for maximizing recovery. Servicers can be AMCs, law firms, or third-party consultants.
• Property securing NPLs: The value of NPLs depends on the collateral and guarantors. Security interests must be properly registered.
• Enforcement strategies: Foreign investors must understand the legal and practical enforceability of NPLs and their security packages. Judicial enforcement has improved in first and second-tier cities, especially in coastal regions.

6. Financing the Acquisition of NPL Portfolios

• Foreign financiers can provide funding to offshore entities that acquire NPL portfolios.
• A typical structure includes:
  • Issuer: Offshore SPV owning 100% of an Intermediate SPV
  • Intermediate SPV: Owns 100% of the Offshore Purchaser
  • Offshore Purchaser: Enters into a sale and purchase agreement (SPA) with the Seller (e.g., AMC)
• Financing Facility: Provides funds to the Issuer, which are on-lent to the Offshore Purchaser.
• Servicing Agreements: Ensure the collection and transfer of NPL receipts to offshore accounts.
• Account Control Agreements: Secure the NRA and Onshore Bank Account in case of default.

7. Enforcement Options and Security Package

• The security package includes pledges over assets, shares, and bank accounts.
• Account control agreements are used to ensure the Security Trustee has control over the relevant accounts.
• The security package allows Financiers to enforce their rights at multiple levels of ownership.

8. Key Issues for Foreign Financiers

• Performance of NPL portfolios: Directly affects the borrower's ability to repay.
• Projected NPL receipts: Includes modeling methodology and stress testing results.
• Marketability of NPL portfolios: Potential buyers in enforcement scenarios.
• Structural and contractual protections: Including regular account sweep arrangements and independent custodian agreements.
• Sponsor and servicer experience: Important for the success of NPL transactions.
• Tax considerations: Both in China and offshore jurisdictions.
• Hedging FX and interest rate risks: Crucial for financial stability.

KWM's Experience

• KWM has been active in the NPL market since 2000.
• They act for both foreign and domestic investors and AMCs in various NPL-related transactions, including:
  • NPL sales and acquisitions
  • Debt recoveries
  • Securitizations and CLOs (Collateralized Loan Obligations)
  • Advising on joint ventures and cross-border issues

Conclusion

The Chinese NPL and ABS markets offer foreign investors and financiers opportunities, but they also present significant legal, regulatory, and operational challenges. The emergence of new access channels, such as the Shenzhen NPL Pilot Program and NPL ABS, has made it easier for foreign entities to participate. However, careful consideration of regulatory compliance, tax implications, servicing arrangements, and enforcement strategies is essential for success in this market.